Category Archives: Corporate income tax

Shortly before President Obama unveiled his proposed fiscal year 2015 Federal budget on March 4th, House Ways and Means Chair Dave Camp (R-Mich.), introduced a sweeping tax reform bill. While President Obama did not call for such a mammoth overhaul of the Tax Code as Camp did, the President did include many tax proposals in his budget, affecting individuals, businesses and tax administration.

In Camp’s bill, two greatly affected groups are taxpayers in high-tax states, who would be impacted by elimination of the deduction for state and local taxes, and corporations, which would benefit from a corporate tax cut, but one that would be partially paid for by higher taxes on small and mid-size businesses that are generally structured as pass-through entities.

Both the President and Camp quickly took to social media to promote their proposals. At a news conference, House Speaker John Boehner (R-Ohio), indicated it was unlikely Camp’s bill would come before the House for a vote. Republican support for many of the President’s proposals remains even less likely before mid-term elections.

Obama’s proposals

As in past budgets, President Obama proposed tax incentives for manufacturing, research, energy, and job creation. The President called for Congress to make permanent the research tax credit and expand incentives for employers to hire veterans. Carried interest would taxed as ordinary income and payroll taxes would be extended to cover distributions from certain pass-through entities engaged in a professional service business.

President Obama signaled a willingness to reduce the corporate tax rate but would require the elimination of some business incentives, particularly tax preferences for fossil fuels, in exchange. The President also proposed a number of international and insurance taxation reforms.

For individuals, President Obama proposed to enhance the earned income credit (EIC) for individuals without children and noncustodial parents, and make permanent the American Opportunity Tax Credit. The President also proposed to reduce the value of certain tax expenditures for higher income individuals.

Camp’s bill

Camp’s bill would replace the current seven individual income tax rate brackets (10, 15, 25, 28, 33, 35, and 39.6 percent) with three rates: 10, 25 and 35 percent. In addition, many incentives for individuals would be repealed, including the state and local tax deduction, the itemized deduction for medical expenses, the adoption credit, deduction for alimony payments, the deduction for higher education tuition, and residential energy credits. A few incentives would be enhanced, such as the child tax credit.

Two popular individual incentives—the home mortgage interest deduction and the charitable contribution deduction—would survive under Camp’s plan but in modified form.

Camp’s bill would gradually reduce the corporate tax rate to 25 percent. Few targeted business tax incentives would survive. Camp’s plan eliminates the Work Opportunity Tax Credit, many energy-related incentives, the rules for like-kind exchanges, and more. However, Code Section 179 small business expensing would be enhanced. The research tax credit would be retained but modified.

CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. E-mail me at michael@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.

Legislation to extend the group of expiring provisions commonly known as “tax extenders” will not be considered by Congress in 2013. House lawmakers will begin their winter district work period on December 13th, but tax extender legislation is not on the legislative floor schedule and no markup is planned in the Ways and Means Committee.

The House is likely to consider legislation dealing with Medicare payment rates for physicians, a fiscal year 2014 budget conference agreement and, possibly, a conference report on the farm bill.

Rather than following its typical pattern of passing a one or two-year extension of tax incentives in late December, Congress could approve an extenders bill in 2014 that applies retroactively, possibly as part of larger comprehensive tax reform legislation.

CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. E-mail me at michael@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.

Optional standard mileage rates for use of a vehicle will go up by 1 cent per mile for 2013. Taxpayers can use the optional standard mileage rates to calculate the deductible costs of operating an automobile.

For business use of a car, van, pickup truck, or panel truck, the 2013 rate will be 56.5 cents per mile. Driving for medical or moving purposes may be deducted at 24 cents per mile. Both rates are 1 cent higher than for 2012.

The rate for service to a charitable organization is unchanged, set by statute at 14 cents a mile.

The portion of the business standard mileage rate that is treated as depreciation will be 23 cents per mile for 2013, unchanged from 2012.

For purposes of computing the allowance under a fixed and variable rate (FAVR) plan, the maximum standard automobile cost for 2013 is $28,100 for automobiles or $29,900 for trucks and vans, increases of $100 and $600, respectively, from 2012. Under an FAVR plan, a standard amount is deemed substantiated for an employer’s reimbursement to employees for expenses they incur in driving their vehicle in performing services as an employee for the employer.

CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. E-mail me at michael@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.

On November 6, 2012, Americans will elect the occupant of the White House for the next four years. As President of the United States, the winner will play a major role shaping tax policy and possibly reforming the entire Tax Code. This briefing describes the tax policies of President Obama and former Governor Mitt Romney, with analysis of the potential impact of their tax positions both for the immediate future and for 2014 and beyond.

Impact

Under current law, the Bush-era tax cuts (reduced income tax rates, reduced capital gains/dividends tax rates, and much more) are scheduled to expire after December 31, 2012. Effective January 1, 2013, sequestration under the Budget Control Act of 2011 is scheduled to take effect, with the goal of reducing the Federal budget deficit by nearly $1 trillion over 10 years. In addition, after 2011, a host of so-called tax extenders expired, and after 2012, numerous additional temporary incentives are scheduled to sunset. Moreover, the 2012 payroll tax holiday, which reduced the employee-share of OASDI taxes by two percentage points, is also slated to expire after December 31, 2012. The combination of all these events has many commentators referring to 2013 as “taxmageddon” or the “fiscal cliff.”

The balance between Democrats and Republicans in the House and the Senate may also change on election day. However, whether either party acquires sufficient political capital, let alone a mandate, on taxes to address short-term issues such as sunsetting provisions and long-term issues like tax reform, remains to be seen.

Caution

Between the date of publication and election day, the positions of the candidates may change. CJBS has based this briefing on what we consider accurate, nonpartisan and unbiased information at the time of publication.

Individuals: 2014 and Beyond

The basic goal for tax reform on the individual tax level expressed by both candidates is to broaden the tax base and lower tax rates. The candidates agree that tax reform should be revenue neutral. Each candidate also forecasts an improved economy from the savings of a simplified tax system and lower overall rates.

Businesses: 2014 and Beyond

Corporate tax reform, and business tax reform in general, has been raised by several Congressional committees and both candidates over the past year as a necessary long range step in making businesses more innovative and competitive. Based upon the multilayered considerations involved, however, concrete changes are not anticipated until 2014 or later. Specific issues include:

Corporate Tax Rates

International Proposals

Other Business Reforms

Note: A more comprehensive PDF version of this brief can be seen on the CJBS website at: http://www.cjbs.com/Email/October2012/CJBS_long.pdf

CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. E-mail me at michael@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.

To help move the Illinois economy to a sustainable recovery, the Small Business Jobs Creation Tax Credit has been extended by Governor Quinn and the General Assembly with some new components.

Effective July 1, 2012, new, full-time jobs created beginning July 1, 2012 to June 30, 2016 will be eligible for tax credits. The program will either run until June 30, 2016 or it will immediately come to a close if $50 million in tax credits are issued prior to that 2016 date.

Overall, not a lot has changed from the pilot program to this extended program. Eligible businesses (and not-for-profit businesses) are still those with 50 or fewer full-time employees. Eligible jobs are those that pay at least $10/hour or $18,200/annually and the position must be sustained for one full year from the hire date.

One important thing to note: You do not have to keep the same individual in the position the entire year, but you will need to make sure the position is filled with any number of employees for at least one year from the actual hire date.

A new piece to this program is that PEO’s (Professional Employer Organizations) would be able to receive a tax credit based on their working relationship with an eligible business. If a PEO has been contracted by an eligible business to issue W-2s and make payment of withholding taxes, then they could enter their information and be eligible to receive a tax credit.

After creating one (or more) new, full-time positions that meet the eligibility requirements, employers are eligible to receive a $2,500 per job tax credit. Theoretically, this will provide an extra boost for employers, enabling them to grow their businesses in Illinois.

To register a position or to learn more about the program please visit www.jobstaxcredit.illinois.gov.

CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. E-mail me at michael@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.

The IRS announced enhancements to its “Fresh Start” initiative by providing higher dollar thresholds for using the streamlined application process for installment agreements and new penalty relief for qualified individuals affected by the economy in 2011. The IRS doubled the dollar threshold amount and increased the maximum term for streamlined installment agreements. Unemployed taxpayers, if they file their returns after April 17th, and the self-employed may be eligible for late payment penalty relief. The agency has updated its online materials about the Fresh Start initiative to reflect the new relief.

Fresh Start

The IRS launched its Fresh Start initiative in early 2011 to help taxpayers affected by the economic slowdown. The IRS modified its lien policies by increasing the lien-filing threshold to $10,000 from $5,000 and by creating a process in which a lien will be released if the taxpayer qualifies for a direct-debit installment agreement. Additionally, it eased and streamlined installment agreements to make them available to more small businesses. Small businesses with an outstanding tax liability balance of $25,000 or less are able to apply for an installment agreement without providing a financial statement and financial verification. Additionally, they could apply for up to 60 months to pay off their outstanding tax liability.

Installment Agreements

Effective immediately, the IRS has raised the threshold amount for using the streamlined installment agreement without having to provide a financial statement or verification from an outstanding tax liability of $25,000 or less to a balance due of $50,000 or less. The agency also increased the maximum term for streamlined installment agreements from the current 60 months to 72 months.

Taxpayers must agree to direct-debit payments. Under the Direct Debit Installment Agreement (DDIA) system, funds are automatically debited from a taxpayer’s bank account for the agreed upon installment amount.

Taxpayers should file Form 9465-F, Installment Agreement Request, but do not need to provide a financial statement, Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, or Form 433-F, Collection Information Statement. Taxpayers seeking installment agreements exceeding $50,000 will still need to furnish a financial statement. Taxpayers must also pay down their balance due if over $50,000 to take advantage of the expanded streamlined program.

Penalty Relief

Taxpayers normally have until April 17, 2012, to file their 2011 tax returns and pay any tax due. Taxpayers requesting an extension of time to file have until October 15, 2012, to file their 2011 returns. This year, certain unemployed and self-employed taxpayers may be eligible for a six-month grace period on failure-to-pay penalties. Penalty relief is available to the following two groups of taxpayers:

Wage earners who have been unemployed at least 30 consecutive days during 2011 or in 2012 up to the April 17th deadline for filing a Federal tax return this year.

Self-employed individuals who experienced a 25 percent or greater reduction in business income in 2011 due to the economy.

The taxpayer’s 2011 calendar year balance must not exceed $50,000. Additionally, the taxpayer’s income must not exceed $200,000 if he or she files a joint return or $100,000 if he or she files as single or head of household.

The request for relief from the failure to pay penalty is only available for tax year 2011 and only if all taxes, interest and any other penalties are paid in full by October 15, 2012.

Generally, taxpayers who fail to pay taxes owed by the original due date are subject to a failure to pay penalty of 0.5 percent of the unpaid taxes for each month or part of a month after the due date that the taxes are not paid. The penalty can reach 25 percent of the unpaid taxes. Thus, under this program, taxpayers will have until October 15, 2012, to avoid the penalty.

The IRS is legally required to continue to charge interest at the current annual rate of three percent on the unpaid tax liability. It does not have the authority to waive statutorily imposed interest. Taxpayers should note that the failure to file penalty remains in effect at 5 percent a month with a 25 percent cap.

Offers in Compromise

The IRS also reminded taxpayers that the expanded streamline Offer in Compromise (OIC) program, one of the first Fresh Start Initiative, is still available. The streamlined OIC application is available to more taxpayers, has fewer financial document requirements, and, most importantly to struggling taxpayers, a greater flexibility and more common-sense approach to determining feasibility of collection.

CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. E-mail me at michael@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.

Democrats and Republicans have begun a two week recess with lawmakers returning home to promote very different visions of tax reform. Before recessing, the House passed a Republican budget blueprint calling for individual and business rate cuts, the Ways and Means Committee approved a GOP small business tax package, and the Senate prepared to debate the so-called “Buffett Rule.” Congress also approved a short-term extension of Federal transportation excise taxes and funding.

The small employer incentive in the Senate bill appears to be a good and targeted expansion of the employer credit in the HIRE Act, Adam Lambert, CPA, managing director, Employment Tax Services, Grant Thornton, LLP, New York, told CCH: “The proposed credit has less limitations and hurdles for small businesses to jump.”

GOP budget

The House voted to approve the GOP budget blueprint on March 29th. The GOP budget proposes to cut the corporate tax rate to 25 percent, reduce the individual tax rates to 10 and 25 percent and eliminate unspecified tax preferences.

Senator Rob Portman, R-Ohio, recently said that he is developing a bipartisan legislative proposal to overhaul corporate taxation and reduce the U.S. corporate tax rate to 25 percent. Portman said his proposal would be revenue-neutral by reducing tax preferences.

Buffett Rule

Democratic leaders have indicated that the Senate will vote on the Buffett Rule after the two week recess. The vote is expected to be on April 16th on the Paying a Fair Share Act, which would subject taxpayers earning over $2 million to a 30 percent minimum federal tax rate. The tax would be phased-in for taxpayers with incomes between $1 million and $2 million.

Small Businesses

On March 28th, the Ways and Means Committee approved the Small Business Tax Cut Act along party lines. The GOP bill would allow a deduction for 20 percent of qualified domestic business income of the taxpayer for the tax year, or taxable income for the tax year, whichever is less. However, a taxpayer’s deduction for any tax year could not exceed 50 percent of certain W-2 wages of the qualified small business.

In the Senate, the Democratic bill would provide a 10 percent income tax credit on new payroll (through either hiring or increased wages) added in 2012. The maximum increase in eligible wages would be capped at $5 million per employer and the amount of the credit would be capped at $500,000. The bill would also extend 100 percent bonus depreciation through the end of 2012.

Transportation

Before recessing, the House and Senate approved an extension of Federal transportation excise taxes and funding, which President Obama signed on March 30th. The extension was necessary because Congress failed to pass a comprehensive transportation bill before the expiration of transportation tax authority and funding.

The Senate-passed transportation bill has become bogged down in the House. Some House members are opposed to its non-transportation tax provisions

CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. E-mail me at michael@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.

The IRS has released guidance and posted online Frequently Asked Questions (FAQs) for employers planning to claim the enhanced Work Opportunity Tax Credit (“WOTC”) for hiring qualified military veterans. The guidance contains transition relief, describes electronic submission of the form used to claim the credit and describes the procedures for tax-exempt organizations to claim the credit.

The WOTC was enhanced as part of the VOW to Hire Heroes Act, passed by Congress at the end of November 2011. Employers who hire members of targeted groups, and who obtain a certification from an appropriate state agency as to each employee’s status as a member of the targeted group, are entitled to a tax credit.

For military veterans, the VOW to Hire Heroes Act expanded the WOTC, which rewards employers with a tax credit for hiring individuals from targeted groups. The “Returning Heroes Tax Credit” and the “Wounded Warriors Tax Credit” are intended to encourage employers to hire unemployed military veterans.

Employers that hire veterans who have been looking for employment for more than six months may be eligible for a maximum $5,600 credit per employee (Returning Heroes Tax Credit); employers that hire veterans who have been looking for employment for less than six months may be eligible for a credit of up to $2,400 per employee. Employers that hire veterans with service-connected disabilities who have been looking for employment for more than six months may be eligible for a credit of up to $9,600 per employee (Wounded Warriors Tax Credit).

Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, must be submitted to the state agency within 28 days of the employee beginning work for the employer. The credit applies in the case of qualified veterans who begin work prior to 2013.

The IRS guidance contains transition relief, providing that employers of veterans hired on or after November 22, 2011, and before May 22, 2012, have until June 19, 2012, to complete and submit the newly revised form to the state agency. The 28-day rule will apply to veterans hired after May 21, 2012. This transition relief also applies to qualified exempt organizations claiming the credit. Qualified tax-exempt organizations that employ veterans who are members of a targeted group also may take advantage of the credit.

The FAQs on the IRS website address topics such as how employers claim the enhanced WOTC for hiring qualified veterans, how a non-profit organization can claim the credit, and more.

In the case of exempt organizations, the credit is allowed against the employer’s Federal Insurance Contribution Act (FICA) tax obligation on wages paid to the veteran within one year of hiring. However, the liability on the organization’s employment tax return is not reduced by the credit; rather, the credit is processed separately and the amount properly claimed is refunded to the exempt organization. This is likely to occur after the filing of the return, so organizations are cautioned not to reduce their FICA obligation on their returns in anticipation of the refund.

CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. E-mail me at michael@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.

The Eighth Circuit Court of Appeals has affirmed a Federal district court decision holding that a portion of the dividends paid to an employee-owner of professional services firm was compensation for services. As a result, the taxpayer earned additional wages and owed additional Social Security taxes.

Taxpayers and the IRS frequently spar over the amount of compensation, and, subsequently, the amount of FICA (Social Security) taxes owed, by a closely-held corporation where the same person owns the company and is its employee. Unlike a partnership, where a general partner’s share of profits is subject to self-employment taxes, distributions to an S corporation stockholder are not subject to FICA taxes.

Background

The taxpayer was working for his own professional corporation (“P.C.”). The P.C. owned 25 percent of a professional services firm that was an S corporation. His P.C. entered into an employment agreement with the S corporation, and he exclusively worked for the firm.

The P.C. paid the taxpayer $24,000 a year as compensation and paid Social Security taxes on that amount. The P.C. received substantial distributions from the firm, which had gross earnings of $2–3 million each year. After the P.C. paid the taxpayer’s salary and other expenses, it distributed the remaining cash to the taxpayer as dividends, amounting to $203,000 in year one and $175,000 in year two.

The IRS determined that the P.C. underpaid employment taxes. A Federal district court agreed, determining (based on the testimony of IRS’s expert) that the taxpayer’s compensation should have been $91,000 a year.

Substance Over Form

To determine the appropriate amount of FICA taxes, the court found that the inquiry was whether payments at issue were remuneration for services performed. Because the corporation was controlled by the employees to whom the compensation was paid, the court gave special scrutiny to the salary amount, since there was a lack of arm’s-length bargaining.

A reasonable compensation determination is usually appropriate to determine the amount of an income tax deduction, but it also applies to FICA tax cases. In an old regulation ruling, the IRS concluded that it could recharacterize S corporation dividend payments because the dividends were paid to stockholders in lieu of reasonable compensation. Courts looking at the FICA issue have also evaluated the economic substance of a transaction.

Reasonable Compensation

The Eighth Circuit agreed with the district court’s conclusion that the value of the taxpayer’s services was $91,000 and that the P.C. owed additional FICA taxes. The P.C.’s purported intent to pay $24,000 as compensation was not relevant, the court concluded. Even if intent mattered, it was not credible that the P.C. intended to pay a mere $24,000 in compensation.

The appeals court said that it was appropriate to determine whether the taxpayer’s compensation was reasonable. Based on the following factors, the appeals court concluded that the district court properly determined the fair market value of the taxpayer’s services: the taxpayer was a qualified professional; the taxpayer worked 35 to 45 hours per week as a primary earner of the firm; the $24,000 supposedly paid was unreasonably low compared to similar professionals; the firm had substantial gross earnings; and the firm made substantial distributions to the taxpayer, especially when compared to the claimed salary.

CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. E-mail me at michael@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.

The IRS has issued limitations on depreciation deductions for owners of passenger automobiles, light trucks, and vans first placed in service during calendar year 2012. Generally, depreciation deduction limits for calendar year 2012 are $100 more than the limits for calendar year 2011. For 2012, the depreciation dollar limits also reflect 50 percent bonus depreciation under the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010.

The Internal Revenue Code (“The Code”) imposes dollar limitations on the depreciation deduction for the year the taxpayer places the passenger automobile in service within its business and for each succeeding year. The IRS adjusts the amounts allowable as depreciation deductions for inflation.

The 2010 Tax Relief Act generally extended the 50 percent additional first year depreciation deduction to qualified property acquired and placed in service before January 1, 2013. The Code increases the first year depreciation allowed for vehicles subject to the luxury vehicle limits, unless the taxpayer elects out, by $8,000, to which the additional first year depreciation deduction applies. The $8,000 amount is not adjusted for inflation.

Passenger Automobiles

The maximum depreciation limits for passenger automobiles first placed in service by the taxpayer during the 2012 calendar year are:

$11,160 for the first tax year ($3,160 if bonus depreciation is not taken);

$5,100 for the second tax year;

$3,050 for the third tax year; and

$1,875 for each tax year thereafter.

Trucks and Vans

The maximum depreciation limits for trucks and vans first placed in service during the 2012 calendar year are:

$11,360 for the first tax year ($3,360 if bonus depreciation is not taken);

$5,300 for the second tax year;

$3,150 for the third tax year; and

$1,875 for each tax year thereafter.

Sport utility vehicles and pickup trucks with a gross vehicle weight rating (GVWR) in excess of 6,000 pounds are exempt from the luxury vehicle depreciation caps.

Leases

Lease payments for vehicles used for business or investment purposes are deductible in proportion to the vehicle’s business use. However, lessees must include a certain amount in income during the year the vehicle is leased to partially offset the amounts by which lease payments exceed the luxury automobile limits.

CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. E-mail me at michael@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.